Is Grameen Lending Efficient?

Abstract

Many believe that a key innovation by the Grameen Bank is to encourage its borrowers to help each other in hard times. To analyze this we study a novel mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank.